Corporate Governance: “Russian Model” in Progress
№3 2003 July/September

Vladimir Potanin is President of the Interros Holding
Company, and Chairman of the Board of Trustees of Russia in Global

Vladimir Potanin

The low quality of corporate governance has been one of the main
obstacles impeding Russia’s economic development. In addition to
heavy taxation, excessive interference from the state and
ineffective judicial and law-enforcement systems, inadequate
corporate governance is a major cause of an unfavorable investment
climate. This leads to the export of capital, as well as the
intimidation of foreign investors.

The quality of corporate governance is a more important factor
than are the company’s current performance indicators, a country’s
foreign trade balance or even certain disproportions in its
economy. According to McKinsey & Company, when assessing
companies operating in transition economies, major investors, as a
rule, give preference to the quality of corporate governance over
economic and financial ratios. Economic imbalances can be removed
if an economy is attractive to investors and if companies have the
means for development. But if the quality of corporate governance
is low, investment will inevitably be small or zero and even rich
natural resources will not radically improve a country’s economy.
Global economic experience indicates that prosperity or decline is
brought about by a state of mind, rather than natural or
technological factors.

Better quality of corporate governance in Russia is a
precondition for sustainable economic development, and for doubling
the country’s GDP by 2010 – a goal set by President Vladimir Putin.
As globalization gains momentum, the future of the country and
Russian companies depends on the Russian economy’s ability to
compete on the world market. Compliance with corporate governance
standards is a means of ensuring a strong competitive drive.

Corporate governance influences the business culture, and this
cannot emerge overnight. This is particularly topical for Russia,
since it only has several years to catch up with countries that
have been traveling down the same road for centuries. Progress in
corporate governance can be made through the pooled efforts of
companies interested in increasing their effectiveness and in
forming a civilized market, as well as of the business community
and government agencies.


Large businesses apply two main models of corporate governance –
American (Anglo-American) and German. In addition to these, there
is a Japanese model. Time will tell whether or not a ‘Russian
model’ will ever emerge on the scene; nevertheless, the business
world will certainly appreciate the unique experience of Russian
companies in rapidly eliminating slovenliness in the workplace.

The American model is defined primarily with the prevalence of
‘outsiders,’ i.e. independent individual shareholders who have no
other business relations with a corporation than through their
share ownership. As a rule, equity is scattered, and most
shareholders are only interested in earnings per share, rather than
in being represented on the board of directors or taking part in
company management. The Americans have an aggressive approach to
business – they quickly and easily dispose of ineffective
divisions, do not hesitate to cut jobs and eagerly enter new types
of business.

The advantages to the American system lie in the mobility of
investment resources and the rapid cross-flow of funds from
stagnant sectors into the more effective ones. Its drawback is that
corporations are intensely targeted at share yields, sometimes to
the detriment of strategic development. On the whole, the American
model looks to be more effective during periods of innovative
growth, but is highly vulnerable during market crises.

The German model is characterized by a high rate of equity
ownership by partner companies and a system for the cross-ownership
of shares. The equity structure is remarkable for high levels of
concentration: as a rule, several major shareholders control more
than 50 percent of the equity. Corporate control is to a large
degree exercised by ‘insiders.’ Ideally, corporations are managed
on the basis of consensus and social interaction between
shareholders and other involved parties, including the employees.
Major shareholders are bound to a corporation through common
business interests. As a result, ties between shareholders and the
company are substantially stronger in Germany than in the United
States, and shareholders are interested in their actual
participation in company management.

The German model’s economic advantages are obvious: shareholders
are primarily focused on attaining long-term strategic goals,
corporations are highly viable, and business relations are stable.
But the reverse side is relatively low flexibility, an excessive
fear of risk, and the inability to make prompt decisions when there
is a need to liquidate/sell ineffective business units or downsize
the staff.

The Japanese model targets social cohesion at the company level,
and business cohesion at an industrial group level. Representation
of current and former managers of a corporation is high on the
board of directors. The Japanese model is characterized by the
active participation of the state, which for a long time was
actively involved in strategic planning. The drawbacks with the
Japanese model came to light over the last 15 years: Japan has been
unable to shake off its years-long stagnation due to the weak
initiative at the lower levels of management, as well as rigid
economic structure.

In transition economies the ‘insider model’ has been broadly
applied with company managers controlling equity; as a rule they
are not interested in the presence of outside shareholders.

It has been widely debated in the Russian media as to which
corporate governance model is the most appropriate for Russia. It
has been argued that if Russia follows the American model it will
inevitably witness scandals similar to the one which engulfed the
Enron corporation. In my opinion, such objections resemble
pointless fears that the ‘steering gear will break down’ when one
changes a cart for a locomotive engine.

Calls to follow in the footsteps of the East Asian models are
groundless. It seems apparent that Japan and the ‘Asian tigers’
succeeded not so much due to the creation of keiretsu and chebols,
as to their willingness to learn and borrow from the experience of
other countries in order to compete successfully. Russian
proponents of large government-controlled companies do not seem to
be eager to learn. Under Russian conditions, the establishment of
powerful chebol-like corporations under state patronage may lead to
the revival of specialized ‘branch ministries,’ a model having
little in common with modern standards of corporate governance. The
United States and Western Europe offer examples of successful
development of holding companies in the market conditions without
the interference and involvement of the state.

It is hardly possible to say at this time that Russia is moving
toward this or that classical model of corporate governance. Strong
mistrust precludes joint ownership of large equity stakes by
business partners, as is the case in Germany. Unlike the United
States, Russians do not invest in shares as an instrument of
saving. At the same time, marketing Russian corporate securities on
the U.S. market may draw certain elements of the American model
into the Russian economy. Regardless, American accounting standards
are being applied on an increasingly broad scale in Russia.

During the past decade, corporate governance has undergone
certain changes around the globe. Modern theories of social
development provide for a transition from ‘capitalism of private
owners’ to ‘capitalism of hired professional managers.’ This
transition certainly has had its effect on corporate governance. In
the early 1990s, a series of studies were published in the United
States and Europe which noted that the power of managers tended to
grow in corporations. The emergence of a ‘new economy’ concept gave
another impetus to those discussions: the proponents of this
concept argue that the ‘new economy’ develops according to special
laws and for that reason many ‘classical’ restrictions on
management activities should be lifted.

In order to restore the balance in owner-manager relations, it
was proposed to strengthen the role of independent directors. The
New York Stock Exchange adopted new rules requiring that
independent directors make up a majority on company boards. In the
wake of the scandals surrounding Enron and WorldCom, information
disclosure requirements were toughened and the responsibilities of
top officials of corporations were increased. New rigid legislation
is being prepared to provide for a broader presence of independent
directors on corporation boards. In other countries, however,
corporate governance rules have not been toughened.

Post-industrial trends have changed internal corporate policies
in Western companies. Their employees are no longer regarded as
hired hands but as creative forces involved in the developmental
process. Whether or not this trend has reached Russia is difficult
to say. Meanwhile, control over insider activities is a
particularly topical issue in Russia. In this respect, the fact
that some major Russian companies have begun inviting independent
directors to their boards inspires optimism.


Cooperation between Russian and foreign companies, the
attraction of foreign investment and the ability of Russian
companies to adopt positive international experience – all these
factors are closely related to corporate governance. The chief
executives of the Russian branch of Sweden’s IKEA Company have said
that the quality of corporate governance is the main criterion when
they choose a Russian partner, as opposed to the quality of its
technical equipment. The reason is that with proper corporate
governance, IKEA can easily apply its technologies in Russia, but
if there are management problems in a company, the strict
observance of quality and deadlines cannot be guaranteed, even if a
supplier boasts the most advanced technological equipment.

Many Russian companies are already operating in a global market
environment. A country may choose to involve itself in the
globalization processes in two different ways.

The first involves integration of the state into all segments of
the global market: industry, finance, services, standards, legal
norms, corporate culture, etc. The country may be a resource
supplier but still enjoy all the fruits of global development,
including progressive technological and structural changes, an
expanded consumer market and higher living standards. Norway, whose
export structure is similar to that of Russia, offers a positive
example of this kind.

The other type of integration involves the export of raw
materials or farm produce only. The inner structure of the
exporting country’s society fails to change and eventually becomes
incompatible with global requirements. Moreover, export revenues
are often used to mothball noncompetitive economies and ineffective
social systems. Negative examples of this variety abound in the
Middle East, Latin America and Africa. Suffice it to say that the
living standards have been declining in the oil-producing Arab
nations, even though they earn vast revenues from their oil

Compliance with the generally accepted corporate governance
standards can be regarded not only as a way to improve company
ratings and improve the overall investment climate, but as a
contribution of Russian businesses to the overall positive scenario
of integrating the country into the globalization process. In
contrast, the negative scenario (companies controlled by government
officials or those close to the authorities) provides for
restricted information about their operations, unprofessional
management and neglect of shareholders’ interests. These are
typical signs of ineffective corporate governance.

Russia has to choose between two routes – a path toward
development and prosperity in close interaction with the most
developed nations, or a path to degradation into a poverty-ridden
third world country ruled by dictatorial methods. It will take
decades of hard work by the entire society, including the state and
businesses, to reach a level of development comparable with the
Western nations. One wrong step, such as an unwarranted use of
force, may set the country back many years. At the same time, it
would not take much effort to turn Russia into a Zimbabwe – one or
two years would be enough to destroy civilized business (or
business which seeks to be civilized) and the conditions for its


The privatization process in Russia in the first half of the
1990s had a decisive effect on the style of management at many
enterprises. Privatization plans called for the formation of joint
stock companies and subsequent transfer of substantial stakes in
them to their administration and employees. They would also sell
part of the shares through auctions and tenders for privatization
vouchers, and later for cash. By the mid-1990s, there were tens of
thousands of joint stock companies in Russia, most of them
controlled by their managers.

Privatization was intended, on the one hand, to form a wide
stratum of proprietors and, on the other, to promote economic
development through the emergence of effective owners and skilled
managers through competition. These goals were at odds with the
interests of most directors, who at that moment already regarded
themselves as sovereign masters of their enterprises; they had no
intention of changing their management style. As the reformers
lacked any serious political footing they had to take account of
those interests. These were stated in legislation which made
employees (but, in fact, the administration) eligible for
privileges during the privatization process.

As a result, the ‘insider’ model prevailed: company managers
acquired controlling or major stakes and tried to oust outside
shareholders. The result was a distorted market, as enterprise
directors, mostly unprepared for work in a market environment,
sought to obstruct competition, were not interested in attracting
investors and outside shareholders, and favored restrictions on
bankruptcy procedures (in fact, they would rather ban it).
Interestingly, those who criticized the privatization initiated by
Anatoly Chubais opposed provisions that allowed ‘strangers’ to gain
control of an enterprise, i.e. they actually favored an even less
effective variant of privatization, with managers being even less

The situation was further aggravated by the fact that many
executives failed to gain full control of equity, which prompted
them to strip assets from their company and ‘squeeze juice’ out of
it. As bankruptcy procedures hardly worked at the time, loss-making
enterprises were not restructured.

Around the globe, business has developed from simple to complex
forms: from sole proprietorships or family-run firms to
partnerships and, finally, to corporations – the highest structural
form of entrepreneurial activities. In the 1990s, Russian business
traveled for the first time down this road, and in the beginning it
was not prepared for real corporate relations. Most joint stock
companies were actually sole proprietorships or partnerships which
were formally given the status of a corporation during
privatization. This discrepancy between form and content resulted
in numerous conflicts.

In fact, this was a sort of ‘anti-corporate governance,’ with
managers confronting unaffiliated shareholders rather than working
in their interests. The chief executives of numerous joint stock
companies made every effort to obstruct the emergence of new
investors and the transfer of shares into the hands of ‘strangers.’
At that moment, there were no forces in the country that were
sincerely interested in cooperation with investors and, therefore,
in attracting investment and creating a favorable investment
climate. No wonder that such a climate was not created at the


In the second half of the 1990s, the business situation started
changing for the better. Rapid development was reported by
companies that were controlled by effective managers from the
former state-owned enterprises, and those led by people who had
started financial and trading businesses themselves and had
obtained resources for entering other lines of business. With their
competitive advantages (particularly in management), such companies
rapidly expanded and sought to improve the investment climate.

Company CEOs and owners became less apprehensive about outside
shareholders than they were during privatization. Many owners made
strategic decisions to separate ownership and management functions.
The ‘corporate wars’ had shown that the damage caused by dubious
methods in competition exceeded the potential benefits, even for
the ‘winners.’

The 1998 crisis dealt a serious blow to progress in corporate
governance. First, many businesses failed to meet their full
liabilities to investors and other business partners. Second, it
took them several years to restructure themselves and win back
their reputation.

Nevertheless, since 1998 impressive progress has been made in
corporate governance. Many companies have adopted international
accounting standards and have grown more transparent, especially
since they are planning to trade their shares and bonds on the
world stock markets. As a favorable portent of the future, the
status of minority shareholders has noticeably improved. A
substantial decline of insider holdings in equity is a positive
factor: according to estimates, their overall interest went down
from 60 percent in 1993-1994 to around 30 percent in 2000.

The positive developments were achieved after most large
business groups completed the consolidation of their assets and the
owners became interested in improving the quality of management and
raising external financing (while at the initial stage, they
focused on acquiring, keeping and restructuring assets). Besides,
many large and medium-sized companies had reached the effectiveness
limits in using their own resources, and had to attract additional
investment for their further expansion and development.

The rich history of Russian ‘corporate wars,’ unfortunately, won
the Russian business community an unfavorable reputation around the
world. Many companies, guided by ethical norms and unable to
protect themselves in court, were forced to waive their moral
principles and respond to rivals’ aggression symmetrically.
Besides, the reputation was damaged by info wars in the media.

But this trend has declined over the last few years. Effective
Russian companies are interested in having a new business climate
in the country, based on civilized rules of business and new ethics
of relations. Effective companies are particularly successful in a
fair market competition, while less competent businessmen seek to
offset their inability to compete by resorting to unethical
methods. Non-government organizations formed by the business
community, in particular, the Russian Union of Industrialists and
Entrepreneurs, have been energetically involved in resolving those
problems. Sound corporate governance is not a short-lived fashion
but a basic requirement of the business community. Russia has had
more problems than achievements in this field to date; indeed,
there are more challenges than accomplishments in corporate
governance. But the Russian business community knows how to solve
the present problems; we are not traveling down a dead-end road, we
are on the highway to success, even if we are not moving as fast as
we would like to.


One large problem in many Russian companies is that their
managers act either exclusively in their own interests, or in the
interests of the largest/affiliated shareholders, rather than in
the interests of all shareholders. In particular, owners receive
income through channels other than dividends, through all sorts of
financial schemes, transfer prices, etc. Naturally, such income is
paid only to those shareholders who control the managers or to the
CEOs who are the owners. Factors that make this possible include
corporate opacity: the largest owner can receive information
directly from managers, while the company’s actual financial state
and financial schemes are not disclosed to outside

Even if the largest owner would like to pay non-dividend income
to outside shareholders, he would find it hard to do. Such payments
would mean that outside shareholders would be involved in the
company’s financial schemes, which are often closely linked with
other businesses of the majority owner. This is risky and

To a great measure, this state of affairs is due to the state’s
economic policy. Heavy taxation, wrongful actions by the tax and
law-enforcement agencies and the need to sidestep unreasonable
barriers in currency control have all encouraged non-transparent
financial schemes, thus preventing companies from opening up to the
public. From the majority owner’s point of view, the payment of
real dividends is a senseless waste of funds in the form of
additional tax payments. Disclosure of information is fraught with
risks of claims by government agencies. Moreover, making public the
actual amount of profits may only serve to whet the appetite of
local and regional authorities who are seeking to get all sorts of
benefits from companies through administrative levers.

The current reform of the tax system, currency controls and the
de-bureaucratization of the economy can only result in improved
corporate governance. Unless state regulation of the economy is
made more effective, it will be virtually impossible to perfect
corporate governance. In this respect, Russia’s main goals include
strengthening the legal and judicial systems, reducing the state’s
involvement in the economy, substantially lowering administrative
barriers and avoiding steps that worsen the investment climate and
undermine the country’s international ratings. Finally, it is
important to make the corporate decision-making process more open
and transparent. To speed up the reform process and improve the
quality of state management, it is necessary to remove the barriers
between the state machinery and the business community, and
encourage successful business people to join government

Many Russian companies still remain outside a competitive market
environment. They lack incentives for improving their professional
level of management as well as their reputations. These are mostly
companies having formal and informal ties with the state, for
example, those enjoying preferential treatment by the regional
authorities. It is very often the case that companies in the
consumer market cannot function unless they are given the green
light by local authorities, who own the land and control power
supplies and utilities. Many companies have a monopoly or
semi-monopoly status in the local markets due to their corrupt ties
with the authorities. As a result, improper corporate governance is
still ‘competitive’ as it is compensated for by monopoly profits
earned through the administrative resource.

To reverse this trend, the state must remove administrative
barriers standing in the way of the development of the real estate
market (including land), and the emergence of a competitive
environment in the utilities sector. Local authorities should also
be stripped of other levers that are capable of placing unwarranted
pressure on businesses.

The classical mechanisms of corporate control have been working
poorly in Russia. For example, in most companies the board of
directors represents the interests of the executive bodies, not
shareholders. Besides, the CEOs of some privatized enterprises have
a strong dislike for control by the shareholders. Such companies
usually lose market competition, therefore there are increasingly
fewer managers who hold such views.

Another factor that played a negative role in the development of
corporate relations was the unceremonious methods used by majority
owners to increase their stakes and thus consolidate equity
control. This led to frequent breaches of minority shareholders’
rights and earned Russian businesses a bad reputation. But cases
like these are rare in Russia now, as few Russian businessmen wish
to have their reputation stained. Furthermore, respective
amendments have been made to the legislation which regulates such

Paradoxically, protection of rights is a highly important issue
for both minority and majority shareholders. Many takeovers of
enterprises in Russia resembled criminal assaults, in which corrupt
courts, bailiffs and police units were involved. We can only be
thankful that the army has never been used!

Two schemes were used in most cases: bankruptcy procedures and a
court-ordered seizure of shares, which are followed by a forcible
seizure of property. Legislative improvements have complicated such
moves. In particular, under the new bankruptcy laws, a solvent
enterprise can repay its debts within the framework of legal
proceedings. The new Arbitration Procedural Code limits
opportunities for the seizure of shares; in fact, it has banned
courts of general jurisdiction from passing verdicts on disputes
between shareholders.

The imperfections of the law-enforcement and judicial systems
have impeded the development of ethical relations in business. A
decline in corruption within these systems could reduce
possibilities for unfair business. The business community has
attempted to offset the weaknesses of the judicial system, even if
partially, by establishing a system of non-government

The reputation factor has become a strong incentive for Russian
businesses to grow more civilized. The business community no longer
regards ‘cutthroat actions’ as a necessary evil and resolutely
denounces them.


The initial steps to improve corporate governance can be
described as a “clean-up stage.” Following privatization, many big
companies, especially in the oil sector, were conglomerates of
dozens of enterprises in which the parent company held stakes of
different sizes. The subsidiaries, in turn, owned smaller
companies, pursued their own policies, which were often different
from those of the parent company, and had their own services and
marketing subdivisions.

To further complicate the picture, some companies were
controlled by a coalition of managers who could not agree on a
uniform management policy. In some cases, the chief executive of an
enterprise, seeking to win the loyalty of his top managers,
delegated to each of them the right to market part of the products
or offered them some other ‘stomping ground’ rights. In turn, each
manager ‘sponsored’ his own inner circle. As a result, dozens of
dubious firms snowballed around the company, and control over their
financial and commodity flows proved to be insufficient.

The first stage in improving corporate governance enabled
company CEOs to exercise real management and control and pursue a
uniform policy based on information about the structure of revenues
and costs.

The next step was transition to a ‘single share.’ Without this,
it would have been virtually impossible to borrow on the stock
market. Besides, making the legal status of the subsidiaries
consistent with their actual status also improved the overall
management of businesses. In some companies, for example Siloviye
Mashiny (Power Machines), this process is still continuing.
Paradoxically, some cases of civilized transition to the single
share were sharply criticized. For example, minority shareholders
of YUKOS really benefited from the company’s restructuring, but
when some of the shareholders decided to sell their shares at above
market prices this sparked a scandal.

After the restructuring was completed and the ‘corporate wars’
ended, many owners could withdraw from daily management and
delegate their authority to professional managers. The leaders of
several major companies decided to delimit the functions of
managers and owners as a step toward a better structure of
management. Invited managers, as a rule, also have other ties with
owners than merely employment relations, i.e. they are not ‘hired
managers’ proper yet. But the situation when owners personally
issued instructions to their personnel will soon become

These internal changes helped companies to shift to modern
corporate governance standards. The main obstacle was their
mistrust of the state: greater transparence would require companies
to pay more taxes; it would make them vulnerable before government
agencies and rivals through various manipulative administrative
levers. But the tax reform and stronger political stability allow
large companies to shift to modern standards of corporate

Further advances were linked with the introduction of Western
business standards. In the framework of this process, the Federal
Securities Commission (FSC) initiated the draft of the Code of
Corporate Conduct which sets down tough requirements, even though
they are non-binding recommendations.

Many companies have drawn up their own corporate codes, among
them Gazprom, Unified Energy Systems, Sberbank, YUKOS, the
Magnitogorsk Metallurgical Works and hundreds of other companies.
In some companies, code implementation is but a token. But Russian
top managers want such documents to really work, while realizing at
the same time that this transition cannot be accomplished

Independent directors as a category have appeared in Russia. For
example, LUKoil bylaws require that there should be at least three
independent directors on the board. There are three independent
directors on Norilsk Nickel’s board. Other companies have announced
similar decisions. The institution of independent directors is
already working and in some cases has even led to conflicts when
independent directors opposed dubious or non-transparent deals made
by the leaders of their companies.

A certain regulatory base has been laid in Russia for the
activities of the independent directors. In particular, the Russian
Association of Independent Directors has drawn up an Independent
Director Code. The code’s provisions, like those of the FSC’s Code
of Corporate Conduct, have imposed tough requirements (similar to
those adopted in the United States) on the independent directors.
Along with formal requirements, an independent director must
obviously be a professional – only in this case will he be able to
properly supervise the company’s activities and take part in the
drawing up of its strategy.

Some companies have started introducing option systems for their
top and mid-level managers, similar to those existing in the United
States. A manager motivation system has already been introduced at
YUKOS. Wimm-Bill-Dann has been developing a similar system,

Many major companies have included the principle of social
responsibility in their corporate strategies. For instance, LUKOIL
has adopted its corporate Social Code. Interros is a party to a
Global Compact for responsible business practice signed under the
UN aegis with UN Secretary General Kofi Annan’s patronage. The full
realization of the principle of social responsibility (which also
includes environmental issues and combating discrimination) is
impossible without the business community’s non-government
organizations taking part.


Russian businesses operate in a situation where there is too
much bureaucratic control, while effective state regulation is
lacking. On the other hand, the state is ready to shed some of its
functions. In this sense, Russia is in step with the global trend
toward greater deregulation. Therefore, mechanisms for the
self-regulation and self-control by the business community should
be created, while the nature of interaction between the state and
the business community needs to be altered.

The business community is ready to make a major contribution to
improving the investment climate in Russia and seeks to make the
market more civilized; these will be standards which all Russian
business people will strive to meet. Those functions must be
performed by the institutions of civil society.

The Russian Union of Industrialists and Entrepreneurs, the
Chamber of Commerce and Industry and the FSC have initiated the
National Council for Corporate Governance (NCCG). Its members
include both top businessmen and government officials, among them
representatives of the Ministry of Economic Development, the
Ministry of Property Relations, and other agencies. The idea to
establish NCCG was discussed by the Russian government’s Council
for Entrepreneurship and supported by Prime Minister Mikhail

NCCG is to become a non-government organization that will
facilitate the business community’s common approaches to corporate
governance standards and assist with their introduction. The
Council will enable business people to agree on certain rules
concerning their activities and define strategic priorities in the
interests of the whole society.

Corporate governance cannot develop unless the state improves
its effectiveness, while the quality of state regulation in some
areas depends on relations inside the business community. NCCG is
to become an important instrument for dialog between the government
authorities and business as both groups almost simultaneously came
to understand that corporate governance issues are coming to the

The process of perfecting the entrepreneurial culture is likely
to be an everlasting process, and it will be very difficult to say
at any given moment that all of the ideals have been attained and
further improvements are impossible. The Council’s objective is to
create a permanent flexible mechanism for perfecting the business
culture. But NCCG will not be a bureaucratic structure with
strictly defined functions, a large staff, etc.

Education will be among the Council’s primary missions. Many
Russian companies are strongly interested in sharing experience and
disseminating advanced methods. But a substantial share of the
business community still cannot see any weighty advantages in
adhering to corporate governance standards. They find it
unnecessary to act strictly in line with corporate ethics. Surveys
indicate that around 17 percent of Russian companies have
introduced or are planning to introduce corporate codes, while
approximately 50 percent of company leaders (mostly mid-sized and
smaller firms) have never heard that such codes exist. Therefore,
the Council must encourage people to do what they may later find
useful and profitable. 

The Commission for Corporate Ethics under the Russian Union of
Industrialists and Entrepreneurs is yet another institution whose
goal is promoting business culture. Out-of-court settlement of
conflicts is particularly relevant in Russia. First, court verdicts
are not always objective. Second, the popular saying that the
severity of Russian laws is offset by their non-observance still
holds true. Third, business ethics cannot be fully reflected in
formal legislation.

The Commission acts as an arbiter intended to settle conflicts
between companies, but its decisions are not binding. Nevertheless,
the Commission is turning into an effective instrument for raising
the level of corporate ethics. Back in the mid-1990s, it was hard
to imagine that recommendations issued by a non-government
organization could have the power to influence business people.
Similarly, no company or person today would like to be the focus of
the Commission, let alone receive a public censure from it. This
explains why the Commission has not had to make a single decision –
after the conflicting parties appealed to the Commission they
promptly reached a ‘pre-trial’ settlement of their conflicts.

The Commission for Corporate Ethics has won international
respect. In particular, the American Chamber of Commerce in Russia
and the Russian Union of Industrialists and Entrepreneurs has
signed an agreement for cooperation in corporate ethics. In
particular, they agreed that if foreign business people face
conflicts in Russia, they should appeal to the Commission.

Another new positive trend is the publication of corporate
governance ratings. In the future, after an authoritative and
generally recognized ranking source emerges, companies will vie for
the lead in these rankings; this will be an important mechanism for
encouraging them to improve their corporate governance. Current
ratings lists strongly differ from each other and many companies
are not even included in them. There are several explanations:
first, it is very hard to find objective criteria to assess the
quality of corporate governance; second, it is very difficult to
collect homogeneous non-financial information from dozens and even
hundreds of companies on their internal policies. Vympelcom is the
only company, perhaps, that ranks among the leaders in all of the
rating lists. As the number of ‘unchallenged leaders’ grows, more
companies will be willing to join them.


The level of Russia’s economic development, its image abroad and
its ability to attract investment depends on the ability of Russian
companies to work effectively. The quality of the investment
climate depends on a balance of risks and opportunities, and in the
1990s that balance proved to be unfavorable. Russia has now passed
the ‘zero level’ and, I believe, will further improve its
investment environment. This will be possible through the Russian
business community’s efforts to improve corporate governance.